AAII Sentiment Survey: Highest Optimism In More Than Three Years

The percentage of individual investors expecting stocks to rise over the next six months is at a level not seen in more than three years. At the same time, the latest AAII Sentiment Survey shows pessimism at its lowest level in more than two years.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 2.1 percentage points to 52.6%. Optimism was last higher on November 13, 2014 (57.9%). This is just the 12th week this year that bullish sentiment is above its historical average of 38.5%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rebounded by 2.8 percentage points to 26.7%. Even with the rise, neutral sentiment remains below its historical average of 31.0% for a fourth consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 5.0 percentage points to 20.6%. Pessimism was last lower on November 4, 2015 (18.6%). The historical average is 30.5%.

Optimism has now risen by a cumulative 23.3 percentage points since hitting a near-term bottom of 29.3% on November 16. Over the same six-week period, pessimism has fallen by a cumulative 14.6 percentage points.

At current levels, bullish sentiment is unusually high, meaning more than one standard deviation above its historical average. Bearish sentiment, conversely, is unusually low, meaning more than one standard deviation below its historical average.

Historically, the S&P 500 has realized below-average and below-median returns over the six- and 12-month periods following unusually high bullish sentiment readings and unusually low bearish sentiment readings. The magnitude of underperformance has been greater when optimism is unusually high than when pessimism has been unusually low. In both instances, returns have still been positive on both an average and median basis. An updated table with the historical readings can be found in my Investor Update commentary from two weeks ago.

Some individual investors are encouraged by the record highs for the major indexes, the tax cuts and/or the Federal Reserve’s decision to continue raising interest rates at a gradual pace. Other individual investors are concerned about the possibility of a pullback or a more severe drop occurring. Also affecting investor sentiment are earnings growth, economic growth, valuations and the lack of volatility. Washington politics remain at the forefront of many individual investors’ minds.

This week’s special question asked AAII members how the recently passed tax legislation affects their expectations for stock market returns. More than half of all respondents (54%) believe the tax cuts will lead to higher stock prices. Many of these respondents anticipate earnings growth, economic growth or more stock buybacks and dividend hikes as a result. Several used the word “positive” in their responses.

Approximately 19% of respondents think the new legislation will have little or no impact on stock prices. Many of these respondents perceive the tax cuts as already being priced in. Nearly 7% of respondents anticipate a mixed impact either with a market decline following a short-term increase or for the cuts to only impact certain sectors or industries.